Factor Investing

Adverse Effects of Index Replication

The empirical research we have reviewed shows that the (hidden) costs of index construction and rebalancing policies to investors are about 10 times the expense ratios.

Anti-Dividend Investing: Yield Matters—But Not How You Think!

Dividends are the comfort food of investing. Who wouldn’t love feeling like they’re getting a seemingly “free” payout just for holding onto a stock? As with all good things, there's a little more—perhaps a whole lot more—to the story. Here’s why: even in a tax-free setting, selling stocks before dividend payouts can lead to abnormal returns.

What is Trend Following? A Painful Journey to Smarter Investing

Trend following, at its core, is a strategy where investors buy an asset when it's going up and sell when it’s going down. But unlike panic-driven investors who sell at the worst possible moment, trend followers adhere to a rules-based approach in an attempt to remove emotion from the equation.

Valuations Reflect U.S. Exceptionalism

US exceptionalism provided the same explanation for the outperformance of US stocks in the 1990s. However, that regime changed. From 2000-2007, while the S&P 500 Index returned just 1.9% per annum (underperforming riskless one-month Treasury bills by 1.3% per annum), the MSCI EAFE Index returned 5.6% per annum, and the MSCI Emerging Markets Index returned 15.3% per annum.

Listing Domicile Driving Valuations

The listing domicile explained about 50% of the valuation gap. In other words, US-listed stocks are substantially more expensive than internationally listed stocks for no reason other than the place of listing.

Global Factor Performance: January 2025

The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Factor Performance Factor Premiums Factor Data Downloads

Investigating Simple Formulaic Investing

Simple, easy-to-implement, systematic formula-based investing can still generate market outperformance, providing investors with efficient exposure to well-documented factor premiums.

What the Index Effect’s Disappearance means for Market Efficiency

One critical, yet often overlooked, choice is how stocks are weighted in the objective function during training, with equally weighted (EW) approaches being the norm. This paper investigates how such choices impact cross-sectional return predictability and the performance of trading strategies derived from these predictions, focusing on the interplay between objective function design and model outcomes.

Do sell-side analysts say “buy” while whispering “sell”?

Managers are more likely to vote for analysts who exhibit greater “say-buy/whisper-sell” behavior toward these man agers. This suggests that analysts reduce the accuracy of their public recommendations, thereby maintaining the value of their private advice to funds.

Improving Low Volatility Strategies

The bottom line is that returns to the low volatility anomaly have only justified investing when low-volatility stocks were in the value regime, after periods of strong market performance, and when they excluded high-volatility stocks that have low short interest (providing clues as to how to improve its performance). This may be why live funds have been generating large negative alphas once we account for common factor exposures.

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